Are you a good employee or simply a good guy? Influence Costs and Contract Design

Resumen

We develop a principal-agent model in which the principal has access to hard and soft information about the agent�s level of effort. We model the soft signal as being informative about the agent�s level of effort but manipulable by the agent at a cost. We show that the presence of influence activities increases the cost of implementing the efficient level of effort for the principal. We also show that the manipulability of the soft signal leads to wage compression. However, when influence costs affect negatively the agent�s productivity we establish that the design of influence-free contracts by the principal may lead to high-powered incentives. This result implies that high-productivity workers may face incentives schemes that are more responsive and give more weight to hard evidence compared to low-productivity workers.